The Boogeyman and Social Securityby Ken Sanders
www.dissidentvoice.org
February 7, 2005

President
Bush devoted a large portion of his State of the Union address to describing
the gloomy future of Social Security. Currently, he is gallivanting around
the country in something reminiscent of a medicine show, doing his best to
scare people into thinking Social Security is in “crisis” and will be
“bankrupt” by the time younger workers begin to retire. He preaches before a
background of charts and graphs, dripping red ink, showing Social Security
in a kamikaze-like nosedive. He even goes so far as to admonish the young
to not look at the charts, fearing the images are too grisly for such tender
youth. Then, after scaring everyone out of their wits, Bush declares that
the only way to “save” Social Security and prevent future retirees from
living on the streets in abject poverty is through personal savings
accounts.

Is the
future of Social Security really so dire? Economists far more knowledgeable
than I don't seem to think so. In fact, according to the folks at
Dollars and Sense magazine and the
Center for Economic and Policy Research, Social Security, while far from
perfect, is in much better condition than Bush would have us believe. As
with the Boogeyman lurking under the bed, turn on the lights and things
aren't so scary.

First
some background. The Old Age Survivors and Disability Insurance Program,
commonly known as Social Security, was enacted in the 1930s as part of FDR's
New Deal. Social Security is an insurance program that protects workers and
their families from the income losses that come with retirement, disability,
or death. It is a “pay as you go” system, whereby taxes paid by today's
workers are not set aside to pay future benefits, but instead go to pay the
benefits of current Social Security recipients.

As
originally designed, Social Security supplemented pensions provided by the
private sector. Since the 1960s, however, corporations have systematically
eliminated pension systems so that today only 16% of all private-sector
workers are covered by pensions. Thus, as a direct result of corporate
efforts to maximize the bottom line, Social Security is now the primary
source of retirement income for nearly two-thirds of America's retirees.
Private-sector pensions have been replaced by defined-contribution savings
plans such as 401(k)s and 403(b)s, which provide some retirement income but
no protection from “longevity risk” (living too long). Unlike Social
Security, which pays retirement benefits until death, once the savings of a
defined-contribution pan are exhausted, that's it.

Social
Security is not limited to retirement benefits. While 70% of Social Security
funds do go to retirees, 15% go to disabled workers, and 15% go to workers’
survivors. Thus, unlike Bush's personal savings accounts, Social Security
shares risk across the entire workforce to ensure that all workers and their
families are protected from the hardships of retirement, disability, and
death. By contrast, Bush's plan would enable high-wage workers to profit
from private retirement investment without contributing to the protection of
lower-wage workers from their disproportionate risks of disability and
death. Furthermore, Social Security, which spends less than 0.6 cents out of
every dollar in benefits paid on administrative costs, is far more efficient
than personal accounts. Under Bush's proposed system, 5 cents of every
dollar would go to administrative costs.

But
wait, you say. The Social Security Administration and Congressional Budget
Office predict that the Social Security trust fund will be bankrupt by 2042
or 2052, respectively. Numbers don't lie, right? Maybe not. However, flawed
assumptions can only lead to flawed conclusions.

For
example, the SSA bases its projections on a forecast of only 1.6% annual
labor productivity growth. The CBO projects 1.9% growth. However, according
to the U.S. Bureau of Labor Statistics, between 1947 and 2003 productivity
rates in the non-farm sector improved an average 2.3% annually. After
adjusting 0.2% for the difference between productivity growth and the growth
of the economy as a whole, economy-wide productivity is still 2.1% since
World War II. Indeed, in no 20-year period, including the Great Depression,
has the U.S. economy grown as slowly as projected by either the SSA or the
CBO. Therefore, each year the economy grows faster than projected, the “zero
balance” date moves farther into the future. This fact is borne out by a
review of the SSA's past predictions for Social Security's bankruptcy. In
1996, the zero balance date was 2030; in 2000 it was extended to 2036; today
that date is 2042. See a pattern?

Additionally, opponents of Social Security obsess over the concept of a
“demographic imperative,” to wit: in 1960, there were 5.1 workers per
retiree, but in 1998 there were only 3.4 and by 2030 there will only be 2.1.
According to opponents, this demographic decline in workers per retiree will
result in insufficient funds to pay Social Security retirement benefits.
Hard to argue with that. Again, however, the premise is flawed.

Social
Security is not limited to retirement benefits but pays disability and death
benefits, as well. Thus, it is the overall dependency ratio (the number of
workers relative to all non-workers, not just retirees) that determines the
future solvency of Social Security. In the 1960s, there were 1.05 workers
for each Social Security dependent. In 2030, there will be 1.27 workers per
dependent -- more than in the past. Compounding the larger number of workers
per dependents is the fact that average worker productivity over the past 50
years has increased approximately 2% annually, adjusted for inflation. Thus,
real worker output doubles every 36 years and is projected to continue to do
so, meaning that workers in 2040 will be twice as productive as today. Such
numbers don't add up to Social Security's bankruptcy.

Speaking
of bankruptcy, the term “bankruptcy” implies that Social Security will cease
to exist. However, even if the trust fund should be depleted, it will not
mean that Social Security will simply turn off the lights and go out of
business. Rather, it will merely revert to a purely “pay as you go system,”
as it was before 1984, and continue to pay current benefits with current tax
revenues. Under such a worst-case scenario, workers’ taxes would need to
increase by only about 2%, and not until 2030.

To meet
its unfunded obligations over the next 75 years, the Social Security trust
fund needs $3.7 trillion. Equaling about 1.89% of taxable payroll and about
0.7% of GDP over the same period, $3.7 trillion is no small sum. However, it
is far less than the 2% of GDP that Bush's 2001 to 2003 tax cuts will cost
over the next 75 years if they are made permanent. Indeed, the CBO-projected
shortfall for Social Security is only 0.4% of GDP, less than the 0.6% Bush's
tax cuts will cost for the richest 1% of taxpayers alone. Indeed, Bush's tax
cuts are disturbingly reminiscent of Reagan's cuts in the 1980s. Reagan's
cuts created the largest government deficits up to that point, the slowest
GDP growth rate aside from the Great Depression, interest rates four times
higher than the historic average, and contributed to Congress raising
payroll taxes in 1984 to pay for Social Security.

Perhaps
this is the real reason Bush is so adamant about “fixing” Social Security
with personal accounts: he needs to pay for his tax cuts. That and a
near-religious opposition to government assistance to anyone other than the
rich and powerful.